TITLE II.

Contracts

Chapter I. General Provisions

A. Definition – Art. 1305

 The above article gives the definition of a contract. It lays emphasis on the meeting of
minds between two contracting parties which takes place when an offer by one party is
accepted by the other.
 In a contract, one or more persons bind himself or themselves with respect to another or
others, or reciprocally, to the fulfillment to give to, to do, or render service or to refrain
from doing some particular thing.
 In a contract, there must be at least two persons or parties, because it is impossible for
one to contract with himself.

Contracts and Obligation Distinguished:

 Contract is one of the sources of obligations.
 On the other hand, obligation is the legal tie or relation itself that exists after a contract
has been entered into.
 Hence, there can be no contract if there is no obligation accepted in return for some
benefit to be enjoyed. But an obligation may exist without a contract such as the
obligation imposed by law to pay taxes.

Contracts and Agreement Distinguished:

 Contracts are binding agreements enforceable through legal proceedings in case the
other party does not comply with his obligation under the agreement. To be valid and
enforceable, contract must be lawful and all the requisites for its validity must be
present.
 Those agreements which cannot be enforced by action in the courts of justice (like an
agreement to go to a dance party) are not contracts but merely moral and social
agreements.
 An agreement is broader than a contract because the former may not have all the
elements of a contract that create legally enforceable obligations.
 So, all contracts are agreements but not all agreements are contracts.

B. Elements

1. Essential elements (see Chapter II, infra)

1 Consent (Art. 1319)
 Consent of the contracting parties;
2 Object (Art. 1347)
 Object certain which is the subject matter of the contract
3 Cause (Art. 1350)
 Cause of the obligation which is established
*Illustration page 386 Domingo

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 C. Characteristics

1. Obligatory force – Art. 1308

Contracts binds both contracting parties:
 A contract is an agreement which give rise to obligations. It must bind both parties in
order that it can be enforced against either.
 Without this equality between the parties, it cannot be said the contract has the force
of law between them.
 It is fundamental rule that no party can renounce or violate the law of the contract
without the consent of the other.
 Hence, “it’s validity or compliance cannot be left to the will of one of them.”

2. Mutuality- Arts. 1308-1310 (see also Art. 1473)

 "ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."
 In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda,
Inc., 21 SCRA 555).
 Article 1309. The determination of the performance may be left to a third person,
whose decision shall not be binding until it has been made known to both contracting
parties. (n)

 Article 1310. The determination shall not be obligatory if it is evidently inequitable. In

such case, the courts shall decide what is equitable under the circumstances.
 Atty. Tandog asked: When will the third person enter?
 Please write the discussion from the book here per Article discussed here.

Case
GSIS v. CA, 228 SCRA 183 (1993)
Phil. Savings Bank v. Castillo, .R No. 193178,
May 30, 2011

3. Relativity
a) Contracts take effect only between the parties, their assigns and heirs- Art 1311
 Article 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person.
 General Rule: As a general rule, a party’s rights and obligations derived from a contract
are transmissible to the successors.

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  Under Art. 1311 Par. 1, contracts take effect only between the parties, their assigns,
and heirs.
 This means that only the parties, their assigns and heirs can have rights and obligations
under the contract.
 As a rule, the act, declaration, or omission of a person cannot affect or prejudice
another without the latter’s authorization.
 Exception: The cases when a contract are effective only between the parties are when
rights and obligations arising from the contract are not transmissible:
a.

CASE
Gutierrez Hmnos. v. Orense, 28 Phil. 571 (1914)

b) No one may contract in the name of another- Art 1317

 Art. 1317. The article speaks of Unauthorized contracts are unenforceable.

 As a general rule, a person is not bound by the contract of another of which he has no
knowledge or to which he has not given his consent.
 A contract involves the free will of the parties and only he who enters into the contract
cab be bound thereby.
 Under this article, a contract is entered into in the name of another by one who has no
authority is unenforceable against the former unless it is ratified by him before it is
revoked by the other contracting party.
 Unauthorized contract is not to be confused with a contract for the benefit of a third
person who may demand it fulfillment provided the requisites mentioned are present.
(Art. 1311, Par 2.)

4. Consensuality

 As a general rule, contracts are perfected by mere consent of the parties regarding the
subject matter and the cause of the contract. (Art. 1315, 1319)
 They are obligatory in whatever from they may have been entered into, provided all the
essential requisites for their validity are present.
 Art. 1356, Almost all contracts are consensual as to its perfection, they come into
existence upon their perfection by mutual consent, even if the subject matter of the
consideration has not been delivered.
 In the absence of delivery, perfection does not transfer title or create real right, yet, it
gives rise to obligations binding upon both parties. (Art. 1305,1308)

D. Parties
1. Auto- Contracts
 Auto-contracts – contracts where the two parties are represented by the one and
the same person, who represents and acts in different capacities (i.e., agent
representing his principal who authorized him to borrow money)

2. Freedom to Contract-Art 1306

 Article 1306. The contracting parties may establish such stipulations,
clauses terms and conditions as may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public policy.
(1255a)
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 This Article stresses the freedom to contract. The right of the people or the
freedom to enter into a lawful contract as to their own convenience and
advantage as long as the contract are not prohibited or contrary to law, morals,
good customs, public order or public policy.

 Validity of stipulations. It is understood that the contract is the law between the
contracting parties and if there is nothing in the contract which is contrary to law,
morals, good customs, public order or public policy the contract must be uphold
or continue.

However, there are limitations on contractual stipulations:

1. Law- it is a fundamental requirement that the contract entered into must

be in accordance with, and not repugnant to, an applicable statute. Its terms are
embodied in every contract. The law thus sets limits.
2. Police Power- When there is no law in existence or when the law is silent,
the will of the parties prevails unless their contract contravenes the limitation of
morals, good customs, public order, or public policy. In short, all contractual
obligations are subject- as an implied reservation therein- to possible exercise of
the police power of the state. Far from being an impairment of contractual
obligations, the exercise of such power constitutes, a mere enforcement of one of
the conditions deemed imposed in all contracts.

Cases
Gabriel v. Monte de Piedad, 71 Phil. 497 (1941)
Pakistan International Airlines v. Ople, 190 SCRA (1990)

a. Special disqualifications (For overview go to REVIEWER)

3. Art. 87, Family Code
Art. 87. Every donation or grant of gratuitous advantage, direct or indirect,
between the spouses during the marriage shall be void, except moderate gifts
which the spouses may give each other on the occasion of any family rejoicing.
The prohibition shall also apply to persons living together as husband and wife
without a valid marriage. (133a)
4. Arts. 1490 and 1491, CC
 Article 1490. The husband and the wife cannot sell property to each other,
except:

(1) When a separation of property was agreed upon in the marriage

settlements; or

(2) When there has been a judicial separation of property under article
191. (1458a)

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  Article 1491. The following persons cannot acquire by purchase, even at
a public or judicial auction, either in person or through the mediation of
another:

 (1) The guardian, the property of the person or persons who may be under
his guardianship;

 (2) Agents, the property whose administration or sale may have been
intrusted to them, unless the consent of the principal has been given;

 (3) Executors and administrators, the property of the estate under

administration;

 (4) Public officers and employees, the property of the State or of any
subdivision thereof, or of any government-owned or controlled corporation,
or institution, the administration of which has been intrusted to them; this
provision shall apply to judges and government experts who, in any
manner whatsoever, take part in the sale;

 (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior

courts, and other officers and employees connected with the
administration of justice, the property and rights in litigation or levied upon
an execution before the court within whose jurisdiction or territory they
exercise their respective functions; this prohibition includes the act of
acquiring by assignment and shall apply to lawyers, with respect to the
property and rights which may be the object of any litigation in which they
may take part by virtue of their profession;

 (6) Any others specially disqualified by law.

5. Art. 1782, CC
 Article 1782. Persons who are prohibited from giving each other any
donation or advantage cannot enter into universal partnership.

3. What they may not stipulate-Art. 1306 (Domingo pg. 392)

 The above provision expresses the Principle of Autonomy of Contracts. In Abe v. Foster
Wheeler Corp., The Supreme Court held that the freedom of contract is not absolute.
The same is understood to subject to reasonable legislative regulation aimed at the
promotion of public health, morals, safety, and welfare.
 It is an elementary rule of contracts that the contracting parties are free to stipulate, the
terms of their contract for as long as the terms are not contrary to laws, morals, good
customs, public policy, public order and notional interests.

a. Contrary to Law, Article 1490, 1491

 In its specific sense, law has been defined as “a rule of conduct, just obligatory,
promulgated by legitimate authority, and of common observance and benefit.
 A contract cannot be given effect if it is contrary to law because law is superior
to contract. Art. 1409 Par.1.

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  Acts executed against the provisions of mandatory or prohibitory laws are void,
except when the law itself authorizes their validity. (Art. 5) The contracting
parties must respect the law which is deemed to be an integral part of every
conduct.

1. Pactum commissorium (Art. 2088; 2137)

Pactum Commisorium – a clause providing that the mortgagee will

automatically own the property mortgaged if the debt is not paid at maturity is
null and void.

Article 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
Article 2137. The creditor does not acquire the ownership of the real estate for
non-payment of the debt within the period agreed upon.
Every stipulation to the contrary shall be void. But the creditor may petition the
court for the payment of the debt or the sale of the real property. In this case,
the Rules of Court on the foreclosure of mortgages shall apply.

2. Pactum leonine (Art. 1799)

One party bears the lion’s share of the risk

Article 1799. A stipulation which excludes one or more partners from any share
in the profits or losses is void.

3. Pactum de non alienando (Art. 2130)

Not alienate

Article 2030. Every civil action or proceeding shall be suspended:

(1) If willingness to discuss a possible compromise is expressed by one or both
parties; or
(2) If it appears that one of the parties, before the commencement of the action
or proceeding, offered to discuss a possible compromise but the other party
refused the offer.
The duration and terms of the suspension of the civil action or proceeding and
similar matters shall be governed by such provisions of the rules of court as the
Supreme Court shall promulgate. Said rules of court shall likewise provide for
the appointment and duties of amicable compounders. 

b. Contrary to morals
 Morals deal with norms of good and right conduct evolved in community. These
norms may differ at different times and places and with each group of people.

c. Contrary to good customs

 Customs consist habits and practices which through long usage have been
followed and enforced by society or some part of it as binding rules of conduct.
It has the force of law when recognized and enforced by law.

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 d. Contrary to public order
 Public order refers principally to public safety although it has been considered to
mean also the weal.

e. Contrary to public policy

 Public Policy is broader than public order, as the former may refer not only to
public safety but also to considerations which are moved by the common good.
 A contract which has the tendency to be injurious to the public or is against the
public good is contrary to public policy. Actual injury need not to be shown.

CASES
Cui v. Arellano, 2 SCRA 205 (1961)
Arroyo v. Berwin, 36 Phil. 386 (1917)
Filipinas Compania de Seguros v. Mandanas,
17 SCRA 391 (1966)
Bustamante v. Rosel, 319 (1966)
Bustamante v. Rosel, 319 SCRA 413 (1999)

E. Classification
1. According to subject-matter
a. Things
 Contract of Sale, Contract of Deposit, Contract of Pledge

b. Services
 Contract of Agency, Contract of Lease of Services

2. According to name
a. Nominate
 Nominate Contract- or that which has a specific name or designation in
law (ex. Commodatum, lease, agency, sale, and etc.);
b. Innominate- Art 1307
 Innominate Contract- that which has no specific name or designation in law.
Case: Dizon v. Gaborro, 83 SCRA 688( 1978)

KINDS OF INNOMINATE CONTRACT:

1. Do ut des – (I give that you may give)

2. Do ut facias – (I give that you may do)
3. Facio ut facias- (I do that you may give)
4. Facio ut des – (I do that you may do)

Do ut des is, however, no longer an innominate contract. It has already been given a
name of its own, i.e. barter or exchange.

Reasons for INNOMINATE CONTRACTS:

 The impossibility of anticipating all forms of agreement on one hand, and
progress of man’s sociological and economic relationships on the other,
justify their provision.

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  A contract will not, therefore, be considered invalid for failure to conform
strictly to the standard contracts outlined in the Civil Code.
 It is sufficient that it has all the elements of a valid contract.
These three elements must be present: consent, object, and cause.

Rules Governing INNOMINATE Contracts:

Innominate contracts shall be governed by:
1. The agreement of the parties
2. The provisions of the Civil Code on Obligations and Contract
3. The rules governing the most analogous contracts
4. The customs of the place.

3. According to perfection
a. By mere consent (consensual) – Art 1315
ARTICLE 1315. Contracts are perfected by mere consent, and from that moment
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. 

 Consensual Contract- that which is perfected by mere consent (eg. Sale, lease,
agency) (Art. 1315)

Discussion:
 As a general rule, contracts are perfected by mere consent of the parties
regarding the subject matter and the cause of the contract.
 They are obligatory in whatever form they may have been entered into, provided
all the essential requisites for their validity.
 Almost all contracts are consensual as to its perfection. They come into
existence upon their perfection by mutual consent, even if the subject matter of
the consideration has not been delivered.
 In the absence of delivery, perfection does not transfer title or create real
right, yet, it gives rise to obligation binding upon both parties. (Art. 1305,
1308)

b. By delivery of the object (real) – Art 1316

ARTICLE 1316. Real contracts, such as deposit, pledge and commodatum, are
not perfected until the delivery of the object of the obligation.

 Real Contract- that which is perfected by the delivery of the thing subject matter
of the contract (eg. Depositum, pledge, commudatum) Art. 1316., Art. 1934,
1963, 2093

Discussion:
 The exceptions are the so-called real contracts which are perfected not merely
by consent but by delivery, actual or constructive, of the object of the obligation.
Art 1316

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  These contracts have for their purpose restitution because they contemplate the
return by a party of what has been received from another.

c. By compliance of formality of solemnity

 Solemn Contract- that which requires compliance with certain formalities
prescribed by law, such prescribed form being thereby an essential element
thereof. (eg. Donation of real property which must be in a public instrument) Art.
1356

Discussion:
 When the law requires that a contract be in some form to be valid, this special
form is necessary for its perfection. Thus, a donation of real property cannot be
perfected until it is embodied in a public instrument.

4. According to its relation to other contracts (Pg. 387 Domingo)

a. Preparatory
 Those which have for their object the establishment of a condition in law
which is necessary as a preliminary step towards the celebration of another
subsequent contract.
 Example: Contract of Partnership, Contract of Agency
b. Principal
 Those which can subsist independently from other contracts and whose
purpose can be fulfilled by themselves.
 Example: Contract of Sale, Contract of Lease
c. Accessory
 Those which can exist only as a consequence of, or in relation with, another
prior contract.
 Example: Contract of Pledge, Contract of Mortgage

5. According to form
a. Common or informal – Art 1356-1358
Art. 1356. Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
However, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties
stated in the following article cannot be exercised.

Discussion:
Contracts are binding upon the contracting parties in whatever form they may have
been entered into as long as all the essential requisites for their validity are
present.

However, when can we consider form as essential requisite of a contract?

The form of a contract is essential:
1. When the law requires that a contract be in certain form for its validity; (refers to solemn
or formal contracts).
2. When the law requires that a contract be in certain form for its enforceability. (refers to
the agreements covered by the Statute of Frauds. (Art. 1403, par 2.)
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 b. Special or formal

 Those which require some particular form.

 Example: Contract of Donation, Contract of Chattel Mortgage

ART. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe
that form, once the contract has been perfected. This right may be exercised simultaneously
with the action the contract.

Discussion:
When form is required by law for its convenience only and the contract is in not that form,
contracting parties may compel each other to observe that form, once the contract required by
the law but if not not essential for validity .of the contract then this art. cannot be made.

Illustration:
Almarion sold leviste a house and lot but the contract appears in a private writing. under the
law, when sale refers real property like house and lot, almario cannot compel leviste to
execute a deed of sale in public documents.

Art. 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission, modification or
extinguishment of real rights over immovable property; sales of real property or of an interest
therein a governed by Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved exceeds five hundred pesos must appear in
writing, even a private one. But sales of goods, chattels or things in action are governed by
Articles, 1403, No. 2 and 1405. (1280a)

The contracts covered by this article are valid and enforceable though not embodied in a public
document or instrument or in writing. The public document is required only for the convenience
and greater protection of the parties and registration is needed only to make the contract
effective as against third persons.

Formal requirements are, therefore, for the benefit of third parties for the purpose of informing
as well as binding them. Non-compliance therewith does not adversely affect the validity of the
contract nor the contractual rights and obligations of the parties there under.

Incidentally, a public document or instrument is one which is acknowledged before a notary

public or any official authorized to administer oath, by the person who executed the same. The
party making the acknowledgment formally declares that the instrument is his free act and
deed while the officer taking the same attests and certifies that such party is known to him and
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that he is the same person who executed the instrument and acknowledged that the
instrument is his free act and deed. Any other instrument is private.

In other words, the law does not require accomplishment of certain acts or contracts in a public
instrument in order to validate the act or contract but only to insure its efficacy so that after the
existence of the act or contract has been admitted or established, the party bound may be
compelled to execute the document.
A private document, however, acquires the character of a public document when it becomes
part of an official record and is certified by a public officer duly authorized by law.

PROBATIVE VALUE OF PUBLIC DOCUMENTS

The effect of the notarization of a private document is to convert the said document into a
public one and renders it admissible in evidence in court without further proof of its authenticity
and due execution.
They enjoy the presumption of validity and regularity. It is not, however, the intention nor the
function of the notary public to validate and make binding an instrument never, in the first
place, intended to have any binding legal effect upon the parties thereto. The presumption is
not absolute and, as stated above, may be rebutted by clear and convincing, not merely
preponderant, evidence to the contrary. Furthermore, notarization per se is not a guarantee of
the validity of the contents of a document.
Public documents are entitled to full faith and credit on their face in the absence of any clear
and convincing evidence, more than merely preponderant, that their execution was tainted by
defects or irregularities that would warrant a declaration of nullity. One who denies the due
execution of a deed where one’s signature appears, has the burden of proving that, contrary to
the recital in the jurat , one never appeared before the notary public and acknowledged the
deed to be a voluntary act.
EXAMPLE
Creation, etc. of real rights over immovable property. — As security for his debt, R mortgaged
his land to E. This mortgage must appear in a public document. The extinguishment of the
mortgage, upon payment of the debt by R, must likewise appear in a public document. Sales
of real property or an interest therein are governed by the Statute of Frauds.
Cession or renunciation of hereditary rights or of those of conjugal partnership of gains. — S
and D are the heirs of F, their deceased father. S, being financially stable, renounces his share
in the inheritance. This renunciation must appear in a public instrument.
Power to administer property. —P is leaving for the United States to study for two (2) years. He
appoints A to manage his property. In this case, the authority of A to administer the property of
P must appear in a public document.

Cession of actions or rights. — R mortgaged his land to E to secure the payment of a debt.
This mortgage appears in a public document. The cession by E of his right, as mortgagee, to
T, must also be in a public document.
ACTION TO COMPEL EXECUTION OF CONTRACT IN PUBLIC INSTRUMENT
Under Article 1357, the parties may compel each other to have the contract reduced in proper
form and the action may be filed simultaneously with the suit to enforce the contract. But the
latter action may be brought without the bringing of the former.
The reduction to writing in a public or private document, required by the law with respect to
certain contracts, is not an essential requisite of their existence, but is simply a coercive power
granted to the contracting parties by which they can reciprocally compel the observance of
these formal requisites. The contract can be enforced even if it may not be in writing. But

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before the contract can be reduced in proper form or enforced, it may be necessary to prove
its existence.
LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES AND ELECTRONIC
DOCUMENTS
R.A. No. 8792, otherwise known as the “Electronic Commerce Act (June 14, 2000) gives legal
recognition to any kind of electronic data message and electronic document used in the
context of commercial and non-commercial activities to include domestic and international
dealings, transactions, arrangements, agreements, contracts and ex-changes and storage of
information.
1. Electronic data message— Information shall not be denied validity or enforceability
solely on the ground that it is in the form of an electronic data message purporting to give rise
to such legal effect, or that it is merely incorporated by reference in that electronic data
message.

2. Electronic documents — Electronic documents shall have the legal effect, validity or
enforceability as any other document or legal writing, and
A. Where the law requires a document to be in writing, that requirement is met by an electronic
document if the said electronic document maintains its integrity and reliability and can be
authenticated so as to be usable for subsequent reference, in that —
I. The electronic document has remained complete and unaltered, apart from
the addition of any endorsement and any authorized change, or any change
which arises in the normal course of communication, storage and display;
and
II. The electronic document is reliable in the light of the purpose for which it
was generated and in the light of all relevant circumstances.
B. Paragraph (a) applies whether the requirement therein is in the form of an obligation or
whether the law simply provides consequences for the document not being presented or
retained in its original form.

C. Where the law requires that a document be presented or retained in its original form, that
requirement is met by an electronic document if —
I. There exists a reliable assurance as to the integrity of the document from
the time when it was first generated in its final form, and

II. That document is capable of being displayed to the person to whom it is to

be presented. For evidentiary purposes, an electronic document shall be the
functional equivalent of a written document under existing laws.
The Act dose not modify any statutory rule relating to the admissibility of electronic data
messages or electronic documents except the rules relating to authentication and best
evidence; nor shall it apply to vary any and all requirements of existing laws on formalities
required in the execution of documents for their validity.

It has also been specified under Article 1318 that notarization is not one of the requirements
for preparing a contract.

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

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 (3) Cause of the obligation which is established.

However, the notarization converts a contract into a public document. While it is not
required, it is suggested that contracts involving land must be notarized as specified
under Article 1358 of the Civil Code.
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of real
property or of an interest therein a governed by Articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the

conjugal partnership of gains;

(3) The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third
person;

(4) The cession of actions or rights proceeding from an act appearing in a public
document.
6. According to purpose
a. Transfer of ownership, e.g., sale
- Ownership of the thing sold may be acquired by the buyer from the
moment it is delivered to him.
- There is delivery when the object is placed in the control and possession
of the buyer.
- When the sale is made through a public instrument, the execution of the
public instrument shall be equivalent to the delivery of the thing.

In a contract of sale, when can the buyer say that he has ownership of the property?

Under the Civil Code:

- The ownership of the thing sold is acquired by the buyer from the moment
it is delivered to him in any of the following:

 when it is placed in the control and possession of the buyer;

 when the sale is made through a public instrument, the execution of the public
instrument shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be inferred;
 with regard to movable property, its delivery may also be made by the delivery of the
keys of the place or depository where it is stored or kept;
 the delivery of movable property may likewise be made by the mere consent or
agreement of the contracting parties, if the thing sold cannot be transferred to the
possession of the buyer at the time of the sale, or if the latter already had it in his
possession for any other reason;
 traditio constitutum possessorium – when the possessor who is the owner of the
property continues his possession no longer under a title of ownership but under a title
less than ownership, e. lessee, depositary, etc.;

13
  the placing of the titles of ownership in the possession of the buyer or the use by the
buyer of his rights, with the seller’s consent, shall be understood as a delivery; or
 in any other manner signifying an agreement that the possession is transferred from the
seller to the buyer.

 However, there instances when seller is still the owner despite delivery. This
includes the following instances:

a. express stipulation;
b. if under the bill of lading the goods are deliverable to seller or agent or
their order;
c. If bill of lading, although stating that the goods are to be delivered to buyer
or his agent, is KEPT by the seller or his agent;
d. When the buyer although the goods are deliverable to order of buyer, and
although the bill of lading is given to him, does not honor the bill of exchange sent
along with it. However innocent third parties (innocent holders and purchasers for
value) should not be adversely affected.

b. Conveyance of use, e.g., commodatum

 In law, conveyancing is the transfer of legal title of real property from one person to
another, or the granting of an encumbrance such as a mortgage or a lien. A typical
conveyancing transaction has two major phases: the exchange of contracts and
completion.
 COMMODATUM. A contract, by which one of the parties binds himself to return to the
other certain personal chattels which the latter delivers to him, to be used by him,
without reward; loan -for use.

c. Rendition of services, e.g., agency

- The Civil Code of the Philippines is the governing law on agency. Article
1868 of the Civil Code states that by the contract of agency, a person
(agent) binds himself to render some service or to do something in
representation or on behalf of another (principal), with the consent or
authority of the latter. In this relationship

7. According to the nature of the vinculum produced

a. Unilateral
 contracts where only one of the parties is bound to fulfill and obligation (i.e.
commodatum, promissory note)
 What is a unilateral contract?

 The easiest way to understand unilateral business contract is by analyzing the word
'unilateral.' In its simplest terms, unilateral contracts involve an action undertaken
by one person or group alone. In contract law, unilateral contracts allow only one
person to make a promise or agreement.

 You might see examples of unilateral contracts every day, too; one of the most
common instances is a reward contract. Pretend you've lost your dog. You place an
advertisement in the newspaper or online offering a $100 reward to the person who
returns your missing “furbaby”. By offering the reward, you're offering a unilateral
14
 contract. You promise to pay should anyone fulfill the obligation of returning your
dog. You're the only person who has taken any action in this contract, as no one is
specifically responsible or obligated to finding your dog passed on this interaction.

 Another common example of a unilateral contract is with insurance contracts. The

insurance company promises it will pay the insured person a specific amount of
money in case a certain event happens. If the event doesn't happen, the company
won't have to pay.

b. Bilateral or reciprocal

 contracts where both parties have reciprocally bound themselves to fulfill their
obligations in favor of the other (i.e. sale) Also known as synalagmatic contracts.
 a synallagmatic contract is a contract in which each party to the contract is bound
to provide something to the other party.

 When most people think of contracts, bilateral agreements come to mind. In its
most basic form, a bilateral contract is an agreement between at least two people
or groups. Most business and personal contracts fall into this category.

 Examples of bilateral contracts are present in everyday life. You're entering this
type of agreement every time you make a purchase at your favorite store, order a
meal at a restaurant, receive treatment from your doctor or even checkout a book
at your library. In each circumstance, you've promised a certain action to another
person or party in response to that person or party's action.

8. According to cause
a. Onerous
 contracts that provide for exchange of valuable considerations (i.e. sale where the
seller delivers the object of the contract and the buyer pays  the purchase price)
 Onerous Contracts -An onerous contract is a contract in which the aggregate
cost required to fulfill the agreement is higher than the economic benefit to be
obtained from it. … Another example of an onerous contract is when a lessee is
still obligated to make payments under the terms of an operating lease, but is no
longer using the assets. 

b. Gratuitous or lucarative
 contracts where one of the parties gives something or renders service to the other
without receiving any equivalent or compensation (i.e.  pure donation,
commodatum).  It is also called the lucrative contract because it provides gain to
the other party for free.

c. Remuneratory

 contracts where one party gives something or renders service to another in

consideration of a previous or past deeds of the other.

15
  Remuneratory Contracts- is one where a party gives something t o another
because of some service or benefit given or rendered by the latter to the former.
 Note that such service or benefit is not due to legal obligations.

Example:
 Miss Rodora gave Miss Macasayon 1 live Carabao, in consideration of the latters
act in saving the former’s cows in times of typhoon .

9. According to risk
a. Commutative
  contracts where the contracting
parties contemplate the assured
fulfillment of the terms and conditions
of their agreement, and there is no
risk to anticipate (i.e. contracts of
mortgage and pledge)
c. Aleatory
 contracts where the fulfillment is dependent on chance or event which may not
happen within the period stipulated, and the loss contemplated may not happen.
(i.e. insurance contract)

 An aleatory contract refers to an agreement between two parties in which the

parties do not have to perform any actions until a certain trigger event occurs. Such
trigger events cannot be controlled by either of the parties, such as natural
disasters and death.

 Such contracts are common in insurance policies where the insurer doesn't have to
pay to the insured until a triggering event occurs, such as the vehicle being stolen
or damaged due to natural disaster. Aleatory contracts, also known as aleatory
insurance, turn out to be helpful because they support the insured person to deal
with the financial risk.

F. Stages

1. Preparation
 This is the stage where the parties begin their intial negotiation, bargaining for the
formation of the contract and ending at the moment of agreement.  It is also called
the preparatory stage.
2. Perfection
 This is the stage where the contract is said to have been born,  where the parties
had a meeting of minds as to the object, cause or consideration and other terms
and conditions of the contract.  It has passed the preparatory state, thus giving birth
to the contract.
3. Consummation or death
 This is the last stage which consists the performance or fulfillment by the parties of
their obligations under the terms of the perfected contract.  Consummation means

16
 the accomplishment, death or termination of the contract where the parties cease
to be contractually related to one another.

G. As distinguished from a perfected promise and an imperfect promise (policitacion)

Contracts Perfected Promise Imperfect Politacion
Establishes and determines the Tends only to assure and pave Mere unaccepted offer
obligation arising therefrom the way for the celebration of a
contract in the future; until the An imperfect promise
contract is actually made, the (policitacion), on the other
rights and obligations are not hand, is a mere unaccepted
yet determined offer.

A perfected promise merely

tends to insure and pave the
way for the celebration of a
future contract.

H. With respect to third persons

1. Stipulations in favor of their persons (stipulations pour-autrui)-Art 11311, 2 nd par.

(page 318 De Leon)

Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person. (1257a)

 Meaning of Stipulation Pour Auturi

- Stipulation Pour Auturi is a stipulation in a contract clearly and deliberately
conferring a favor upon a third person who has a right to demand its
fulfillment provided he communicates his acceptance to the obligor before its
revocation by obligee or the original parties.
 Classes of stipulations Pour Auturi:
- Stipulations in favor of a third person may be divided into two (2) classes;
namely:
a. Those where the stipulation is intended for the sole benefit such person.
This stipulation, in effect, confers a gift, it being necessary in such case to apply
the rules relating to donations insofar as the form of acceptance is concerned; and
b. Those where an obligation is due from promise to the third person which
the former seeks to discharge by means of such stipulation, as, for instance, where
a transfer of property is coupled with the purchaser’s promise to pay a debt owing
from the seller to a third person.
In the first case, the third party said to be a done beneficiary while in the
second, he is called creditor beneficiary.
17
  Requisites of Stipulation Pour Autrui:
They are the following:

b. The contracting parties by their stipulation must have clearly and deliberately
conferred a favor upon a third person;
c. The third person must have communicated his acceptance to the obligor before
its revocation by the oblige or the original parties;
d. The stipulation in favor of the third person should be a part, not the whole, of the
contract.
e. The favorable stipulation should not be conditioned or compensated by any kind
of obligation whatever, and
f. Neither of the contracting parties bears the legal representation or authorization
of the third party for otherwise, the rules on agency will apply.
CASES:
Florentino v. Encarnacion, 79 SCRA 192 (1977)
Coquia v. Fieldmen’s Insurance Co., 26 SCRA 178 (1968)
Constantino v. Espiritu, 39 SCRA 206 (1971)
Integrated Packaging Corp. v. CA G.R No. 115117,
June 8, 2000
2. Possession of the object of contract by third persons- Art 1312
Art. 1312. In contracts creating real rights, third persons who come into possession
of the object of the contract are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws. (n)

 Third persons are bound by contracts; creating real rights:

- This article is an exception to the general rule that a contract binds only the
parties.
- Third persons who come into possession of the object of a contract over
which there is real right, are bound thereby even if they were not parties to
the contract. A real right is binding against the whole world and attaches to
the property over which it is exercised wherever it goes.
- Thus, a contract subjecting certain real properties to the payment of certain
debts, registered in accordance with the Property Registration Decree,
constitutes a real right, which is produced not by the contract but by the
publicity given by the Registry, such publicity prejudicing the right of third
persons.
- However, if the real right is not registered, third persons who acted in good
faith are protected under the provisions of the Property Registration Decree.

3. Creditors of the contracting parties- Art 1313

Art. 1313. Creditors are protected in cases of contracts intended to defraud
them.
 This is also an exception to the principle of relativity of contracts.

 Right of creditor to impugn contracts intended to defraud them:

18
 - Article 1313 is another qualification to the rule that contracts take effect only
between the parties. The creditor is given the right to impugn the contracts of
his debtor to defraud him.
- (Page 411, Domingo) Further, Article 1381 of the Civil Code provides that
contracts entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due them.
4. Interference by third persons- Art 1314
Art. 1314. Any third person who induces another to violate his contract shall be
liable for damages to the other contracting party. 

 Liability of third person responsible for breach of contract:

- This is a rule of American Law. It is also proper under the general
principles of the Philippines law, because a contractual right is property.
- Article 1314 recognizes an instance when a stranger to a contract can be
sued for damages for his unwarranted interference with the contract. It
presupposes that the contract interfered with is valid and the third person
has knowledge of the existence of the contract.

 What is TORT INTERFERENCE? (page 411 Domingo)

- Article 1314, expresses the Principle of Tort Interference. This is an
exception to the principle of relativity of the contracts.
- The tort recognized in that provision is known as interference with
contractual relations. The interference is penalized because it violates the
property rights of a party in a contract to reap the benefits that result
therefrom
- While it is true that a third person cannot possibly be sued for breach of
contract because only parties can breach contractual provisions, a
contracting party may sue a third person not for breach but for inducing
another to commit such breach.
 Elements of Tort Interference:
a. Existence of a valid contract:
- As regards the first element, the existence of a valid contract must be duly
established .
b. Knowledge on the part of the third person of the existence of a contract
- The second element, on the other hand, requires that there be knowledge
on the part of the interferer that the contract exists.
c. Interference of the third person is without legal justification.
Cases:
Daywalt v. La Corporacion de los Padres Agustinos
Recoletos, 39 Phil, 587 (1919)
So Ping Bun v. CA, 314 SCRA 751

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 Chapter II. Essential Requites of Contracts

A. Concept
1. Requisites – Art 1319
a. Must be manifested by the concurrence of the offer and acceptance

Article 1319

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance
absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from the time it came
to his knowledge. The contract, in such a case, is presumed to have been entered into in the
place where the offer was made. (1262a).

Discussion:

Consent is the conformity of wills; and with reference to contracts, it is the agreement of the
will of one of contracting party with the another or others, upon the object and terms of the
contract.

Essentials of consent: It is essential for consent to be given properly that is given by two or
more competent parties, freely spontaneously and intelligently, and that the intention of the
parties had been clearly and unmistakably expressed.

Offer must be certain: The law requires that the offer must be certain in order that the liability
of the contracting parties may be fixed, such that the acceptance must be identical with the
offer, otherwise there will be no meeting of minds and consequently no contract.

Acceptance absolute: The requirement that the acceptance be absolute simply means that it
must in every respect meet and correspond with the terms and condition of the offer, plain and
unconditional.

Illustration: Raj asked Darren this question: “Do you agree to buy my bicycle for
P8,000.00?” Darren in answer to Raj said, “Yes I agree.” Here the offer of Raj to sell his
bicycle to Darren is certain and acceptance of Darren to buy the bicycle is absolute, plain and
unconditional.

Qualified acceptance: In the preceding illustration: supposing Darren instead of agreeing to

pay Raj P8,000.00 for the price of the bicycle proposed to pay only P6,000 to Raj. Was there a
valid acceptance? No. The proposal of Darren to Raj to pay for a lesser amount constituted a
counter-offer. If Raj accepts the counter offer of the P6000 instead of P8,000 the contract
between them is perfected.

20
 Cases:

Rosenstock v. Burke, 46 Phil. 217 (1924)

Malbarosa v. CA, 402 SCRA 168 (2003)

1.Offer
a. Must be certain – Art. 1319 (Offer definition p. 333 Domingo)
Offer must be certain: The law requires that the offer must be certain in order that the
liability of the contracting parties may be fixed, such that the acceptance must be
identical with the offer, otherwise there will be no meeting of minds and consequently no
contract

b. What may be foxed by the offeror- Art 1321

Article 1321

The person making the offer may fix the time, place, and manner of acceptance,
all of which must be complied with. (n)

Discussion:
The acceptance must be made known to the offeror before the lapse of the fixed
period.  If the acceptance was made after the fixed period, it is not a legal acceptance
anymore.  What happens then is that it becomes an offer (made by the previous
offeree) which may or may not be accepted by the original offeror (which becomes the
offeree).
In terms of the manner of acceptance, the offeror may require that the acceptance be
done by letter, personal communication, or through a representative.
Acceptance which was not made in the manner fixed by the offeror constitutes a
counter-proposal which extinguishes the offer and may not be accepted by the original
offeror.

c. When made through an agent – Art. 1322

Article 1322

An offer made through an agent is accepted from the time acceptance is

communicated to him.

Discussion:
This article means that when an offeror appoints a third person as his agent to
represent him, the offer by the agent, when accepted by the offeree, is deemed
accepted not from the knowledge of the acceptance by the offeror (principal) but from
the moment the agent has received the communication of acceptance. The meeting of
the minds is thus established.
The agent must be authorized by the offeror. An example of an agent is an attorney-in-
fact, authorized through a power of attorney. If the intermediary is not authorized, the
offer is not binding to the offeror.
The offeree may also act through an authorized agent.

21
 Illustration:
Jay was appointed by Zola as his attorney-in-fact. Jay wanted to enter into a contract
with Joy for the lease of Joy’s warehouse. The offer was made through Zola. Joy
accepted the offer. The reckoning point for the acceptance of the offer, or the giving of
consent is the moment when Zola was informed by Joy that she accepts the offer, and
not the time when Zola informs the offeror Jay of the acceptance by Joy of the offer.

d. Circumstances when offer becomes ineffective – Art 1323

Art. 1323
An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of
either party before acceptance is conveyed.

Discussion:
Definition of Civil Interdiction, insanity and insolvency
Civil Interdiction – mandatory accessory penalty deemed imposed whenever the sentence
rendered is within the range of reclusion temporal to death. If the latter is not executed by
reason of commutation or pardon.

Insanity – legal term for mental disorder; disease or defect of the brain.

Insolvency – inability or the lack of means to pay one’s debt.

Illustrations:
          Death: Maria Mercedes offer to sell her beach resort to Luis Sancuevas for the amount
of 1.5M pesos but before the day that they are going to meet up for the payment and their
contract will be made, Maria Mercedes died therefore the meeting of the mind of the two
parties became ineffective because of the death of Maria Mercedes.
          Civil Interdiction: In the preceding illustration, supposing that Maria Mercedes was
sentenced for life imprisonment because she was found guilty in murder case and there is no
acceptance had been conveyed by Luis to Maria before the sale, therefore the offer made by
Maria became ineffective because her sentenced carried with civil interdiction.
          Insanity: Same as the above illustration if Maria Mercedes became insane before Luis
Sancuevas accepted her offer the contract became ineffective because an insane person
cannot give consent to a contract.
          Insolvency: Also, if Maria Mercedes was declared by the court as an insolvent person
due to her inability or lack of means to pay one’s debt before Luis Sancuevas accepted the
offer therefore the meeting of the minds of the parties is not valid because of the insolvency of
the offeror.

e. Business advertisements of things for sale – Art 1325

Article 1325

Unless it appears otherwise, business advertisements of things for sale are not definite
offers, but mere invitations to make an offer. (n)

TERMINOLOGY:
Business Advertisements of things for sale may or may not constitute definite offer. The matter
depends on the circumstances:
If advertisement contains all the necessary data needed in a contract, it is a definite offer for
the sale of the thing advertised.
22
 Illustration:
For Rent/Lease for 5 years: Commercial space located at #1 Patimabao Sta. Cruz, Laguna: 50
square meters with restroom and parking space (excluded form the 50 square meters); Rental
Price: 30, 000.00 php. Please contact owner, Ralph Callueng  at said address by letter,
telegram. You may also email P/[email protected] or send a text message through
0917-888-8888.

When the ad appears to be a definite offer to sell, the advertiser cannot withdraw the offer
once somebody had accepted it.

If the advertisement does not contain all the important data for the future contract, it is not a
definite offer and just a mere invitation to make an offer.

Illustration:
For Rent/Lease: Commercial space located at #1 Maitim Street, Brgy. Patimbao, Sta. Cruz,
Laguna: 50 square meters with restroom and parking space (excluded form the 50 square
meters); Rental Price: 30, 000.00 php, negotiable. Please contact owner Ralph Callueng at
said address by letter, telegram. You may also email at P/[email protected] or send a
text message through 0917-888-8888.

Clearly, the advertisements are just invitations for people to make offers. If the offers are
made, the same may or may not be accepted by the advertiser being mere invitations

f. Advertisements for bidders – Art. 1326

Article 1326
Advertisements for bidders are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary
appears.

Case:
Jardine Davies v. CA, 333 SCRA 684 (2000)
2.Acceptance
a. Must be absolute – Art 1319 (Page 335 Domingo)

Acceptance of offer must be clear and absolute:

Basically, a contract consists of an offer and an acceptance of that offer. The
acceptance of that offer must not only be clear; it must be absolute, unconditional, or
unqualified, that is, it must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds.

If the acceptance is qualified, as when it is subject to a condition, it merely constitutes a

counter-offer which, in law, is considered a rejection of the original offer and an
attempt by the parties to enter into a contract on a different basis.

b. Kinds
i. Express – Art 1320
23
 An express acceptance occurs when a person clearly and
explicitly agrees to an offer or agrees to pay a draft that is
presented for payment.

ii. Implied – Art. 1320

An implied acceptance is one that is not directly stated but
is demonstrated by any acts indicating a person's assent to
the proposed bargain. An implied acceptance occurs when
a shopper selects an item in a supermarket and pays the
cashier for it. The shopper's conduct indicates that he or
she has agreed to the supermarket owner's offer to sell the
item for the price stated on it.

iii. Qualified – Art. 1319

A conditional acceptance, sometimes called a qualified
acceptance, occurs when a person to whom an offer has
been made tells the offeror that he or she is willing to agree
to the offer provided that some changes are made in its
terms or that some condition or event occurs. This type of
acceptance operates as a counteroffer. A counteroffer
must be accepted by the original offeror before a contract
can be established between the parties.

c. If made by letter or telegram- Art. 1319, 2nd par.

Art. 1319, 2nd par.

Acceptance made by letter or telegram does not bind the offerer except from the time it
came to his knowledge. The contract, in such a case, is presumed to have been
entered into in the place where the offer was made.

i. Four theories on when the contract is perfected:

1. Manifestation Theory
Manifestation theory refers to a legal theory recognizing an injury as an insurable loss
when injury is manifested to an injured. Manifestation theory is also an insurance
doctrine stating that an injury or disease is covered under the policy, on a first
appearance of symptoms of the covered injury or disease. Manifestation theory is
also known as exposure theory, actual-injury trigger, or triple trigger.

However, some injuries do not manifest themselves immediately between the

occurrence of the event and time when the injury becomes apparent. The
consequences are referred to as delayed manifestation injuries. A delayed
manifestation injury is not recognized under manifestation theory and hence
coverage cannot be provided under insurance policy.

The following is an example of a case law defining manifestation theory:

Manifestation theory states that an insurance coverage applies under a policy if the
property damage manifests during the policy period, regardless of when the act from
24
 which it resulted occurred.[Audubon Trace Condo. Ass'n v. Brignac-Derbes, Inc., 924
So. 2d 1131 (La.App. 5 Cir. Feb. 27, 2006)].

2. Expedition Theory
Contract is complete the moment the offeree does the action necessary to
communicate his acceptance.  Whether it has come to the notice of the offeror or
not, is immaterial.

3. Reception Theory
  Contract is complete the moment the acceptance is received by the offeror. 
Whether he has read it or not is immaterial.  This theory takes into consideration the
possibility of loss in transit.

4. Cognition Theory- Art. 1319, 2nd par.

A contract is complete only when the acceptance comes to the actual knowledge of
the offeror.  Indian law  Section 4: The communication of an acceptance is
complete -as against the proposer, when it is put in a course of transmission to him
so as to be out of the power of the acceptor; as against the acceptor, when it comes
to the knowledge of the proposer.

d. Period of acceptance – Art 1324

Article 1324
When the offerer has allowed the offeree a certain period to accept, the offer may
be withdrawn at any time before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as something paid or
promised. (n)

Discussion:

The article applies only to a situation where the offeror has allowed the offeree “a
certain period of time to accept”. This is giving the offeree the option to accept or not to
accept within a fixed period of time.

The time of acceptance will depend on the circumstances:

If a period is fixed by the offeror;

If no period is fixed by the offeror.

Case: Sanchez v. Rigos, 45 SCRA 368 (1972)

e. Contract of option – Art. 1324

Option contract, concept. It is a contract between the offeror and the offeree whereby
the former grants the latter, for a valuable consideration, the privilege to buy or not to
buy certain objects at anytime within the specified period and for a fixed price.

The option contract or contract of option is separate and distinct from the principal
contract which the parties may enter into later if they finally conclude their main
25
 agreement. It is therefore a preparatory contract to the principal contract should the
parties, finally consummate their transaction which is under negotiation. The matter is
said to be still under negotiation because the offeror may or not take advantage of the
privilege granted him.

Option money and earnest money

Option money – is the consideration paid in an option contract. If the principal contract
is not consummated, the option money is not refunded

Earnest money is the payment made to the seller by the buyer to show his good faith. It
will constitute as part of the purchase price, if the sale is finally consummated. It is also
a proof of the perfection of the contract. If the sale is not concluded, the earnest money
shall be returned to the would be buyer unless there is a contrary agreement.

What is an option contract?

It is a contract between the offeror and the offeree whereby the former grants the latter,
for a valuable consideration, the privilege to buy or not to buy certain objects at anytime
within the specified period and for a fixed price.

The option contract or contract of option is separate and distinct from the principal
contract which the parties may enter into later if they finally conclude their main
agreement. It is therefore a preparatory contract to the principal contract should the
parties, finally consummate their transaction which is under negotiation. The matter is
said to be still under negotiation because the offeror may or not take the advantage of
the privilege granted him.

Case: Adelfa Properties v. CA, 240 SCRA 565 (1995)

b. Necessary legal capacity of the parties

1. Who cannot give consent – Art 1327

Article 1327
The following cannot give consent to a contract:

(1) Unemancipated minors;

(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

Discussion:

Persons Who Cannot Give Consent To A contract. –

Unemancipated Minors. – minors below 18 years of age. There are no more unemancipated
minors above 18 since the legal age was reduced from 21 to 18. Emancipation by marriage
and parental concession had already been eliminated. Children below 18 by themselves being
minors cannot enter into valid contracts. However, If misrepresented his age on the contract by
26
stating of his age, and other party was misled, the contract shall be binding upon him on the
basis of estoppel.

Insane Or Demented Persons. – When a person is insane or demented, his is detached from
reality. He does not know what he is doing. He cannot act with legal effects. Consequently, he
cannot enter into valid contracts. During lucid intervals, as may happen in rare cases, they may
enter into valid contracts because at this moment, they are sane and capable of knowing what
they are doing.

Deaf-Mutes. – Not all deaf-mutes are disqualified to give consent to contracts. Only those who
do not know how to write are disqualified.

Effects Of Contracts Entered By incapacitated Persons. –

The contracts entered into by the incapacitated persons enumerated in the law are not void.
They are only voidable if only one party cannot give his consent. But if both parties are
incapacitated to give consent, the resulting contract is unenforceable (Art. 1407).

Exceptions When Minors Are Liable Under Their Contracts Despite Their Minority.-

1.When the minor, in entering into a contract actively However, if there is merely silence in the
contract as to the age of the minor, the fraud is not actual but only constructive, the minor is
not bound by his signature. He is guilty only of passive misrepresentation.

2.When the contract involves the sale and delivery of necesarries to the minor, he is bound
thereby (Art. 1489).

3. When the minor, upon reaching the age of majority ratifies the contract he becomes bound
thereby.

4. When the contract is in the form of savings account in the Postal Savings Bank, provided
the minor is at least 7 years of age, the same is valid.

5. When the contract is an insurance for life, health and the accident on the minor’s life.

2. When offer and/or acceptance is made

Article 1328
Contracts entered into during lucid interval are valid. Contracts agreed to in a
state of drunkenness or during a hypnotic spell are voidable.

1. Some Voidable Contracts by Reason of Incapacity

The voidable contracts referred to in this Article are those entered into by:

a. During a lucid interval

Insane or demented persons (unless they acted during lucid interval);

b. In a state of drunkenness

27
 Those in the state of drunkenness (which temporarily results in complete
loss of understanding, and may therefore be equivalent to temporary insanity).

c. During a hypnotic spell

Those entered into during a hypnotic spell (induced by drugs, or by
deliberate or unintentional hypnotism) or while a person walks during his sleep,
somnambulism, for in these cases, a person is incapable of intelligent consent.

Article 1329

The incapacity declared in Article 1327 is subject to the modifications determined by

law, and is understood to be without prejudice to special disqualifications established
in the laws. (1264)

Discussion:

The persons enumerated under Article 1327 incapacitated to give consent to contracts due to
their lack of mental capacity to do so. They are either deaf-mutes, insane or demented.

On the other hand, the special disqualifications mentioned in Article 1329 refer to those
explicitly disqualified by law from entering certain contracts:

Persons enumerated in Article 1491 due to fiduciary relationship or dur to public

policy;
Husband and wife cannot enter into contract of donation, sale or lease with each
other because they are not allowed to donate, sell or lease properties to one
another. This includes those who live as husband and wife without the benefit of
marriage;
Insolvents until they are discharged;
Non-Christians inhabitants of Mindanao and Sulu cannot enter into contract involving
real estate without the approval of the chairman of the Commission on National
Integration.

Incompetents who may be placed under judicial guardianship (under Rule 92,
Section 2 of the Revised Rules of Court):

those suffering the penalty of civil interdiction;

hospitalized lepers;
prodigals;
deaf and dumb who are unable to read and write;
those of unsound mind even though they have lucid intervals;
those who by reason of age, disease, weak mind, and other similar causes, cannot
without outside aid, take care of themselves and manage their property, becoming
thereby an easy prey for deceit and exploitation.
Incapacity to give consent to contracts and special disqualifications distinguished:

28
 Those who are incapacitated to give consent to contracts are not prohibited to to
exercise their right to enter into a contract. They can still do so through a guardian
with the approval of the court.

Those who are specially discqualified are prohibited whether or not they have
representation. They are absolutely disqualified from entering into a contract.

The first one renders the contract voidable, while the second renders it void.

c. The contract must be intelligent, free, spontaneous, and real- Arts. 13301346

1. Effect – Art. 1330

Article 1330
A contract where consent is given through mistake, violence, intimidation,
undue influence, or fraud is voidable.

Discussion:

Vitiated consent, in the old civil code, makes the contract void. In the new civil code,
it merely renders the contract voidable.

The reason for the voidability is because consent must be intelligent, free and
spontaneous. Intelligent consent is vitiated by mistake or error, freedom by
intimidation, violence and undue influence and spontaneity by fraud.

Proof to needed to sustain annulment- To annul the contract on the ground of

vitiated consent, there must be full, clear and convincing evidence and not merely a
preponderance of evidence.

29
 2. Vices of consent (Definition p. 347 Domingo)

(Characteristics of Consent Page 346 De Leon)

Aside from the incapacity and simulation of contract, the following are the causes
that vitiate consent or render it defective so as to make the contract voidable.

1. Error or Mistake (Art. 1331)

2. Violence or force (Art. 1335)
3. Intimidation or threat or duress (Ibid.)
4. Undue influence (Art. 1337) and
5. Fraud or deceit (Art. 1338)

a. Mistake or error
Definition:
 Mistake or Error is the false notion of a thing or a fact material to the contract.
 It has also been defined as a “misunderstanding of the meaning or implication of
something” or “a wrong action or statement proceeding from faulty judgment”
Example:
 An example of mistake as to the object of the contract is the substitution of a
specific thing contemplated by the parties with another.

Nature of Mistake:
1. Mistake should refer to the substance of the thing which is the object of the
contract.
2. Mistake should refer to those conditions which have principally moved one or
both parties to enter into the contract; and
3. The mistake maybe unilateral when only one party is mistaken about the material
fact, or bilateral when both parties are in error. Generally, a person who makes
mistake cannot avoid liability to the innocent party unless he shows that he was
free of fault or negligence.

 To invalidate consent, the error must be real and not that one that could have been
avoided by the party alleging it. The error must arise from facts unknown to him. He
cannot allege an error which refers to a fact known to him or which he should have
known by ordinary diligent examination of the facts. An Error so patent and obvious that
nobody could have been avoided by ordinary prudence, cannot be invoked by the one
who made it in order to annul his contract.

 Mistake of facts which law refers (page 348 De Leon)

i. kinds

3. Mistake of fact

30
 Mistakes of fact arise when a criminal defendant misunderstood some fact that
negates an element of the crime. For instance, if an individual is charged with
larceny but believed that the property he took was rightfully his, this
misunderstanding negates any intent to deprive another of the property. One
important qualification, however, is that this mistake of fact must be honest and
reasonable. Thus, a defendant cannot later claim that he or she was mistaken when
he or she actually knew the situation. Likewise, the mistake must be one that would
appear reasonable to a judge or jury. If the same individual was repeatedly told that
the property was not his, and he could not take it, it would no longer be reasonable
for him to mistakenly have believed that he could rightfully take the property.

Mistakes of fact may apply to a variety of crimes. Some crimes may set forth that
mistake of fact is a defense. Otherwise, if the criminal defendant can prove that the
mistake reasonably negated an element of the crime, the defense will usually be
held to apply and absolve the defendant of liability.

(Please refer to Page 349 of De Leon for Discussion and Examples)

a. as to substance of the object
b. as to principal conditions
c. as to identify or qualifications of one of the parties
d. as to quantity, as distinguished from a simple mistake of account

CASES:

Theis v. CA, G.R. No. 126013, February 12, 1997

Heirs of William Sevilla, et. Al v. Leopoldo
Sevilla, 402 SCRA 501 (2003)

3. Error of Law (Art. 1334)

 Mistake of Law is that which arises from an ignorance of some provisions of law,
or from, or from an erroneous interpretation of its meaning, or from an erroneous
conclusion as to the legal effect of an agreement, on the part of one of the
parties.

a. General Rule: Ignorantia legis neminem excusat – Art 3.

Art. 3.  Ignorance of the law excuses no one from compliance therewith.

- As a rule, mistake of law does not invalidate consent because “ignorance of the
law excuses no one from compliance therewith” (Art. 3) This doctrine is based on public
policy, dictated by expediency and necessity.

b. Exception: Mutual error of law-art. 1334

Article 1334. Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.

Discussion:
 (Page 353 De Leon)
31
Requisites for the Application of Article 1334
 (Page 353 De Leon)
Illustration:
 (Page 353 De Leon)

ii. When one of the parties is unable to read- Art. 1332

Article 1332. When one of the parties is unable to read, or if the contract is
in a language not understood by him, and mistake or fraud is alleged, the person
enforcing the contract must show that the terms thereof have been fully
explained to the former.

Discussion:
Rationale behind the article. The code commission found it necessary to
incorporate the article into the code because of its belief there is still a fairly large
number of illiterates in the country, and documents are ordinarily drawn in English or
Spanish.
In the law of evidence, it is presumed that “a person intends the ordinary
consequences of his voluntary act; or a person makes ordinary care of his concerns”.
No contract shall arise unless its acceptance is communicated to the offeror.
The presumption does not apply in the following cases:
When one of the contracting parties is unable to read;
When the contract is written in a language not understood by the said party.
If the contracting party is an illiterate or even if literate, but he could not
understand the language used in the contract which he signed, and later, he alleged
fraud and mistake in the execution thereof, there is a presumption created that there
was fraud or mistake when he signed or gave his conformity to the contract.
The burden of proof is shifted now to the party who is enforcing the agreement.
He must prove that the document was fully explained to the party alleging fraud or
mistake. Failure to rebut the presumption will sustain the charge of fraud or mistake.
When can there be a presumption that there was fraud in the execution of the
contract if the contracting party is illiterate or even if literate?
There is a presumption created that there was fraud or mistake when he signed
or gave his conformity to the contract if he could not understand the language used in
the contract which he signed, and later, he alleged fraud and mistake in the execution.

Cases:

Hemedes v. CA, 316 SCRA 347 (1990)

Katipunan v. Katipunan, G.R. No. 13415,
January 3-, 2002

iii. Inexcusable mistakes- Art. 1333

Article 1333. There is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the contract.
 If a party beforehand the doubt, contingency, or risk affecting the
object of contract, it is to be assumed that he willing to take chances
and cannot, therefore, claim mistake. This is especially true where
the contract is aleatory.
32
  Illustration: (Page 352 De Leon)

Violence and Intimidation- 1335

Article 1335. There is violence when in order to wrest consent, serious or
irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his person
or property, or upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and condition of the
person shall be borne in mind.
A threat to enforce one's claim through competent authority, if the claim is
just or legal, does not vitiate consent.

Definition:
 Violence: There is violence when in order to wrest consent, serious or irresistible force
is employed.
 Intimidation: There is intimidation when one of the contracting parties is compelled by
a reasonable and well-grounded fear of an imminent and grave evil upon his person or
property, or upon the person or property of his spouse, descendants or ascendants, to
give his consent.

Discussion:
 Nature of Violence: Violence requires the employment of physical force. Under Art.
1335, to make consent defective, the force employed must be either serious or
irresistible. In either case, consent is not free.
- Illustration: Page 355 De Leon
 Nature of intimidation or threat, REQUISITES: (Page 355 Domingo)
- Illustration: Page 355 De Leon
 Factors to determine degree of intimidation:
Discussion: Page 356 De Leon
 Threat to enforce just or claim:
- A threat to enforce one’s claim through competent authority, if the
claim is just or legal, DOES NOT vitiate consent.
- Illustration: (Page 452 Domingo)

i.Effect – Art 1336

Article 1336. Violence or intimidation shall annul the obligation, although it
may have been employed by a third person who did not take part in the
contract. 

Violence or intimidation by a third person:

-Violence or intimidation may be employed by a third person who did not take
part in the contract. However, to make the contract voidable or annullable,
it is necessary that the violence or intimidation must be of the character
required in Article 1353.

33
 Case: Martinez v. Hongkong and Shanghai Bank,
15hil 252 (1910)

Undue influence- Art 1337

 Definition of Undue Influence: (Page 358 De Leon)

 Circumstances to be considered: (Page 358 De Leon)

Fraud or dolo – Art. 1338

 Article 1338. There is fraud when, through insidious words or machinations of
one of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to. 
 Discussion:
Concept of Causal fraud- This article does not define fraud but merely states that there is
fraud if a person is induced to enter into a contract through insidious words or machination of
another. Fraud is every kind of deception or misrepresentation designed or schemed to lead a
party into substantial mistake or error, and relying thereon, he executes a particular act leading
to his damage or prejudice. Fraud is a deception to gain consent, without necessarily
constituting estafa or a felony.

 How Causal Fraud is Committed:

- Page 359 De Leon
 Requisites of Causal Fraud:
- Page 359 De Leon

Cases:
Woodhouse v. Halili, supra
Geraldez v. CA, 230 SCRA 320 (1994)

i. Kinds

dolo causante- Art 1338

 In contracts, fraud known as Dolo Causante or Causal Fraud is basically a concept
deception used by one party prior to or simultaneous with the contract, in order to
secure the consent of the other. Needless to say, the deceit employed must be serious.
(Requisites and Examples page 359 De Leon)
dolo incidente – Art 1344, 2 nd par.
 In contradistinction, only some particular or accident of the obligation is referred to by
incidental fraud or dolo incidente, or that which is not serious in character and without
which the other party would have entered into the contract anyway.

Kinds of Fraud:
Basis Fraud in performance Fraud in perfection

Occurs after the valid Occurs before or

Time of occurrence
execution of the simultaneous with the
34
 contract. It is employed
creation or perfection of
in the performance of a
the obligation
pre-existing obligation

Consent is vitiated by
Consent Consent is free serious deception or
misrepresentation

Not ground for Ground for annulment of

Effect
annulment the contract

Action for annulment

Remedy Action for damages only
with damages
Causes of Fraud in Perfection:
Dolo causante (causal Dolo incidente
Basis
fraud) (incidental deceit)

It is the efficient cause

Nature to the giving of consent Not the efficient cause
to the contract

Renders the contract Does not affect the

Effect
voidable validity of the contract

Annulment with
Remedy Claim for damages only
damages
DOLO CAUSANTE AND DOLO INCIDENTE DISTINGUISHED TABLE: (Page 455 Domingo)

ii. Failure to disclose facts; duty to reveal them- Art 1339

Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.

Discussion Illustration: Page 361 De Leon

Case: Rural Bank of Sta. Maria v. CA 314 SCRA 255

(1999)

iii. Usual exaggerations in trade; opportunity to know the facts-

Art. 1340
Article 1340. The usual exaggerations in trade, when the other party had an opportunity
to know the facts, are not in themselves fraudulent.
Discussion:

The article refers to the usual exaggerations in trade which are not fraudulent by themselves
when the party has the opportunity to investigate and know the true facts.

35
The exaggerations are also known as “dealer’s talk” or “traders talk” or “dolus bonus” which
constitute tolerated fraud as long as the other party has the opportunity to check and know the
facts.

What tolerated fraud covers. Tolerated fraud or dealer’s talk usually refers to the
misrepresentation of traders tending to minimize the perceived defects of the thing or service
advertised for sale; exaggerations or magnifications of its qualities, and its establishment with
qualities that it does not possess.

Dealer’s talks do not give rise to actions for damages because of their insignificance or
because it is the credulousness or stupidity of the victim which is real cause of his loss.

When there is a written contract, what does not appear on the face of the contract should be
regarded as trader’s talk. Hence, the need to remember always the maxim “caveat emptor”.

Caveat emptor – the buyer has the duty to check the title of the seller over the property plus
other circumstances necessary for his own protection. Otherwise he would be buying the
property at his own risk.

What is tolerated fraud?

Tolerated Fraud refers to misrepresentation of traders tending to minimize the perceived

defects of the thing or service advertised for sale; exaggerations or magnifications of its
qualities, and its embelishment with qualities that it does not pass.

What is caviat emptor?

It is a Latin word meaning Buyer’s beware. The buyer has the duty to check the title of the
seller over the property plus other circumstances necessary for his own protection. Otherwise,
he would be buying the property at his own risk. There is a presumption that a person takes
ordinary care of his concerns followed by another presumption “that the ordinary course of
business has been followed”.

Case: Laureta Trinidad v. IAC, 204 SCRA 524 (1991)

iv. Mere expression of an opinion- Art 1341

Article 1341. A mere expression of an opinion does not signify fraud, unless made by
an expert and the other party has relied on the former's special knowledge. 
 Discussion/ Illustration: Page 363
 Exception:
- Misinterpretation by third person vitiates consent if the misinterpretation has created
substantial mistake and the same is mutual.
Ex. Medical Opinion of someone and caused death to the other.

1. Effects – Art. 1344

Article 1344. In order that fraud may make a contract voidable, it

should be serious and should not have been employed by both
contracting parties.
36
  Discussion, REQUISITES, and Illustration: Page 365 De
Leon
 The Degree of Evidence Needed to Prove the Existence of
Fraud. (Page 462 Domingo)
 Fraud and Bad Faith, DISTINGUISHED. (Page 463
Domingo)

Case: Songco v. Sellner, 37 Phil. 254 (1917)

e. Misrepresentation
i. by a third person – Art. 1342
Discussion/ Illustration- Page 364 De Leon

ii. ii. Made in good faith – Art. 1343

Article 1343. Misrepresentation made in good faith is not fraudulent but may
constitute error.

 Discussion/Illustration (Page 365 De Leon)

iii. iii. Active/passive

Cases:
Mercado and Mercado v. Espiritu, 37 phil. 215 (1917)
Braganza v.Villa Abrille, 105 Phil. 456 (1959)

f. Simulation of Contracts
Article 1345. Simulation of a contract may be absolute or relative. The former takes place
when the parties do not intend to be bound at all; the latter, when the parties conceal their
true agreement.
Concept of simulation- Simulation of a contract is the deliberate act of making a
fictitious agreement by the parties for the purposes of deception, when in fact the juridical act
that appears on the contract does not really exist or is different from what is actually agreed
upon. Simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings.
Cases:
Rodriguez v. Rodriguez, 28 SCRA 229 (1914)
Suntay v. CA, 251 430 (1995)
Blanco v. Quasha G.R. No. 1331148,
November 17, 1999

2 juridical acts involved in simulation:

1. Ostensible act- it is the apparent but fictitious document or conduct executed by the
parties. It is always void.
2. Hidden act- it is the true or real agreement contemplated by the parties. It is valid if it is
not contrary to law etc.

i. Kinds – Art 1345

1. Absolute

37
 Absolute simulation- is one where the parties do not intend to be bound by the contract. It
is not really intended to produce any legal effect, nor does it alter the juridical situation of the
parties.

Ex: In the sale of a fishpond, it was made to appear that the price was paid when in fact it was
not. The sale being without consideration is fictitious.

2. relative

Relative simulation- is one where the parties conceal their real agreement by disguising it
under another contract.

Ex: A donor is donating a property to a donee. Instead of executing a deed of donation, the
donor instead executed a deed of sale to conceal the donation intended.

Reason for the invalidity of absolutely simulated contracts- lack of true consent, and its
prejudice to a third person and is generally fraudulent.

ii. Effects- Art 1346

Article 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties to their
real agreement.

TABLE on Absolute (Simulados) and Relative (Disimulados) on the REVIEWER:

Recovery in absolutely simulated contracts:
1. Right to recover is given if the simulation is not intended for an illegal purpose.
2. In the event that it is intended for an illegal purpose, the contract is void. The act is
subject to:
3. Article 1411. If both are in pari delicto, and the act constitutes a criminal offense, both
are prosecuted. If one is innocent, the innocent may claim what he has given without
any obligation to comply with the promise.
4. Article 1412. If the act constitutes a non-criminal offense, and both are at fault, none
may recover. If only one is at fault, the innocent party may demand the return of what he
has given without any obligation to comply with the promise.
5. A third person or creditor who is prejudiced by the fraudulent simulated contract may
attack the nullity of the contract, if he is not in bad faith.

38
 B. Objects of Contracts
1. What may be the objects of Contracts – Art 1347
Article 1347. All things which are not outside the commerce of men, including future
things, may be the object of a contract. All rights which are not intransmissible may
also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly
authorized by law.

All services which are not contrary to law, morals, good customs, public order or
public policy may likewise be the object of a contract.
 Discussion:
- The object of a Contract is its subject matter.
- In reality, the object of every contract is the obligation created. But since a contract
cannot exist without an obligation, it may be said that the thing, service, or right which is
the object of the obligation is also the object of the contract.
KINDS of OBJECT of CONTRACT:
- Object certain is the essential element of a valid contract. The object may
be things (as in sale), rights (as in assignment of credit), or services
(agency)
A. Requisites of things as object of Contract:
- Discussion page 372 De Leon
B. Requisites of Services as Object of Contract:
- Discussion page 372 De Leon
C. Rights as Object of Contract:
- Discussion Page 372 De Leon

Below are EXCEPTIONS to Rights as Object of Contract: (Page 373 De

Leon)
a. All things not outside the commerce of man
b. All rights not intransmissible
c. All service not contrary to law, morals, good customs, public , or public
policy

2. Requisite – must be determinate as to its kind – Art 1349

Article 1349. The object of every contract must be determinate as to
its kind. The fact that the quantity is not determinate shall not be an
obstacle to the existence of the contract, provided it is possible to
determine the same, without the need of a new contract between the
parties.
39
 Discussion page 375 De leon

3. What may not be the objects of contracts

Enumerate the Examples under “Rights as Object of Contract pg. 372 De
Leon)

a. Future inheritance, except when authorized by law – Art 1347 Par. 2

Article 1347.

No contract may be entered into upon future inheritance except in cases

expressly authorized by law.

Cases:
Blas v. Santos, 1 SCRA 899 (1961)
Tanedo v. CA, G.R No. 104482, January 22, 1996

b. Future support
- Please refer Reviewer
c. Impossible things or services- Art 1348
- Please refer Reviewer

D. Cause of Contracts
 Please refer to page 378 of De Leon for the ff.

1. Meaning of cause – Art 1350

a. In onerous contracts
b. In remuneratory contracts
c. In contracts of beneficence

2. As distinguished from motive- Art 1351

Article 1351. The particular motives of the parties in entering into a
contract are different from the cause thereof. 

 Please refer to page 380 De Leon for the Ff.

- Meaning of Motive
- Case Distinguished from Motive

40
 3. Detective causes and their effects:
Article 1352. Contracts without cause, or with unlawful cause,
produce no effect whatever. The cause is unlawful if it is contrary to law,
morals, good customs, public order or public policy.

a. Absence of cause and unlawful cause- Art. 1352

 Please refer the ff. on page 381 of De Leon

Case: Liguez v. CA, 102 Phil. 577 (1957)

b. Statement of a false cause in the contract – Art. 1353

Article 1353. The statement of a false cause in contracts shall render them
void, if it should not be proved that they were founded upon another cause
which is true and lawful.

c. Lesion or inadequency of cause – Art. 1355

Article 1355. Except in cases specified by law, lesion or inadequacy of
cause shall not invalidate a contract, unless there has been fraud,
mistake or undue influence.

 Please refer the ff. on page 384 of De Leon

 Meaning of Lesion
 Effect of Lesion or Inadequacy of Cause

Case:
Carantes v. CA, 76 SCRA 514 (1977)
Sps. Buenaventura, et. Al v. CA, 416 SCRA 263 (2003)

4. Presumption of the existence and lawfulness of a cause, though it is not

stated in the contract- Art. 1354
Article 1354. Although the cause is not stated in the contract, it is
presumed that it exists and is lawful, unless the debtor proves the
contrary. 

41
 Chapter III. Form of Contracts

A. General rule: Contracts shall be obligatory, in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.
(“Spiritual system: of the Spanish code)- Art 1356

Article 1356
Contracts shall be obligatory, in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law
requires that a contract be in some form in order that it may be valid or enforceable, or that
a contract be proved in a certain way, that requirement is absolute and indispensable. In
such cases, the right of the parties stated in the following article cannot be exercised.
(1278a)

Meaning of Form of Contracts:

 The form of a contract refers to the manner in which a contract is executed or
manifested.
 The contract may be oral, or in writing, or partly oral and partly in writing.
 It may be express when the parties expressly set forth their intentions, or implied when
their intentions may be inferred from their actions or conduct.
 If in writing, it may be in a public or a private instrument.

When contract considered in written form:

 (Page 388 De Leon)

Classification of Contracts According to form:

 According to the form or method used in creating the contract, they are:
1. Informal or common or simple contract (Page 389 De Leon)
2. Formal or Solen Contract (Page 389 De Leon)

B. Exception: When the law requires that a contract be in some form in order that it
may be valid or enforceable . (Anglo-American principle)- Art. 1356

Rules regarding form of Contracts:

 General Rule:
 Exceptions:
 (Page 389 De Leon)

Case: Hernaez v. De los Angeles, 27 SCRA 1276 (1969)

42
C. Kind of formalities required by law:
1. Those required for the validity of contracts, such as those referred to in Arts.
748, 749, 1874, 2134, 1771, 1773;
1. ARTICLE 748. The donation of a movable may be made orally or in writing.

An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.

If the value of the personal property donated exceeds five thousand pesos, the
donation and the acceptance shall be made in writing. Otherwise, the donation shall be
void. (632a)
 Donation of Personal Property of the value of which exceeds P5,000- the
donation and acceptance must bein writing (Art. 748)

2. ARTICLE 749. In order that the donation of an immovable may be valid, it must
be made in a public document, specifying therein the property donated and the value
of the charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in a separate public
document, but it shall not take effect unless it is done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof
in an authentic form, and this step shall be noted in both instruments. (633)
 Donation of Real Property- it must be in a public instrument (Art. 749)

3. ARTICLE 1874. When a sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.
(n)
 Sale of Land through an Agent- the authority of the agent must be in writing;
otherwise the sale is void.

4. ARTICLE 2134. The amount of the principal and of the interest shall be specified
in writing; otherwise, the contract of antichresis shall be void. (n)

5. ARTICLE 1771. A partnership may be constituted in any form, except where

immovable property or real rights are contributed thereto, in which case a public
instrument shall be necessary. (1667a)

ARTICLE 1773. A contract of partnership is void, whenever immovable property is

contributed thereto, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument. (1668a)
 Contract of Partnership- if immovables are contributed, it must be in a public
instrument to which shall be attached a signed inventory of the immovable
property contributed.

6. Those required not for validity, but to make the contract effective as against
third persons, such as those covered by Art. 1357 and 1358; and
ARTICLE 1357. If the law requires a document or other special form, as in the acts
and contracts enumerated in the following article, the contracting parties may compel

43
 each other to observe that form, once the contract has been perfected. This right may
be exercised simultaneously with the action upon the contract. (1279a)

ARTICLE 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of real
property or of an interest therein are governed by articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the

conjugal partnership of gains;

(3) The power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice a third
person;

(4) The cession of actions or rights proceeding from an act appearing in a public
document.

All other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one. But sales of goods, chattels or things in action
are governed by articles 1403, No. 2 and 1405.

7. Those required for the purpose of proving the existence of the contract, such as
those under the Statute of Frauds in Art. 1403.
 In the cases of contracts covered by Statute of Fraud, the law requires that they
be in writing subscribed by the party charged or by his agent.

Chapter IV. Reformation of Instruments

ARTICLE 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties
may ask for the reformation of the instrument to the end that such true intention may be
expressed.

If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds
of the parties, the proper remedy is not reformation of the instrument but annulment of the
contract.

Definition:

44
Reformation- is that remedy allowed by law by means of which a written instrument is
amended or rectified so as to express or conform to the real agreement or intention of the
parties when by reason of mistake, fraud, inequitable conduct, or accident, the instrument fails
to express such agreement or intention.

Discussion:
 Par. 1 [Ill. In a contract of construction of a building, the parties agreed that
payment in dollars. The dollar sign was used in the original draft. However
what was typewritten in the contract, occassioned by mistake, was the peso
sign. Reformation was ordered by the court.

 Par. 2 [Ill. Where a party is leasing his property to another, the latter through
fraud was able to make him sign an absolute deed of sale, the action is not for
reformation but for annulment of the instrument.

A. Requisites (Art. 1359);

1. Meeting of the minds upon the contracts.
2. The true intention of the parties is not expressed in the instrument ; and
3. The failure of the instrument to express the true agreement is due to mistake,
fraud, inequitable conduct, or accident.
 Requisites of Action for Reformation

1.There is a contract agreed upon where there is a meeting of the minds

2.The real intention of the parties was not expressed in the instrument.

3.The reason for the instrument to express the real intention of the parties is
mistake, fraud, inequitable conduct or accident did not prevent the meeting of
the minds of the parties.

4.The said intervening mistake, fraud, inequitable conduct or accident did not
prevent the meeting of the minds of the parties.

Cases:
Garcia v. Bisaya, 97 Phil. 609 (1955)
Bentir v. Leande, 330 SCRA 591 (2000)

B. Cases where no reformation is allowed- Art 1366

ARTICLE 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;

(2) Wills;

(3) When the real agreement is void.

C. Implied Ratification – Art 1367

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 ARTICLE 1367. When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.
 Discussion and Illustration (Page 401 De Leon)

D. Who may ask for reformation

ARTICLE 1368. Reformation may be ordered at the instance of either party or his
successors in interest, if the mistake was mutual; otherwise, upon petition of the injured
party, or his heirs and assigns.
 Discussion and Illisutration Page 403 De Leon

E. Procedure of reformation – Art. 1369

ARTICLE 1369. The procedure for the reformation of instrument shall be governed by
rules of court to be promulgated by the Supreme Court.
 The Rules of Court governs the procedure. However, the Supreme Court has not as yet
promulgated the procedure for the reformation of instruments.
 Don’t recite this! An action for the reformation of instruments happens to “quiet title to
real property or remove clouds therefrom.” This action for reformation of instruments
falls under the jurisdiction of the Regional Trial Court.

Cases:

Atilano v. Atilano, 28 SCRA 2232 (1969)

Carantes v. CA, supra
Sarming, et. Al v. Cresencio DY, et.al., 383 SCRA 131 (2002)

Chapter V. Interpretation of Contracts

(Compare with Rules on Statutory
Construction)
Definition:
 Interpretation of a Contract- is the determination of the meaning of the terms or
words used by the parties in their written contract. It is the process of ascertaining the
intention of the parties known the written words contained in the contract.

A. Primacy of Intention – Arts. 1370, 1372

ARTICLE 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the parties, the latter
shall prevail over the former. (1281)
Discussion:
 It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. The Court must not read into any other intention
of the contracting parties contradictory to the plain meaning.

46
  The terms of an agreement or writing are presumed to have been used in their primary
and general acceptation. However, evidence may be admitted to show that they are
used in a local, technical or otherwise peculiar signification.

 Legal Meaning

 In interpreting a writing according to its legal meaning, it is to be interpreted according to

the legal meaning it bears in the place of its execution, unless the parties intended
otherwise (Rule 130, Section 10 of the Rules of Court).

 The MTC has no jurisdiction of the issue is interpretation, enforcement and/or rescission
of the contracts.

 Only the laws existing at the time of the execution of the contract applies to the contract
unless the intention is for it to retroact.

ARTICLE 1372. However general the terms of a contract may be, they shall not be
understood to comprehend things that are distinct and cases that are different from
those upon which the parties intended to agree. (1283)
Discussion:
 (Discussion and Illustration page 408 De Leon)
B. How to determine intention – Art 1371
ARTICLE 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (1282)
 Discussion and illustration page 407 De Leon

C. How to interpret a contract

ARTICLE 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most adequate to
render it effectual. (1284)

ARTICLE 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them taken
jointly. (1285)

ARTICLE 1375. Words which may have different significations shall be understood
in that which is most in keeping with the nature and object of the contract. (1286)

ARTICLE 1376. The usage or custom of the place shall be borne in mind in the
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established. (1287)

ARTICLE 1377. The interpretation of obscure words or stipulations in a contract

shall not favor the party who caused the obscurity. (1288)

ARTICLE 1378. When it is absolutely impossible to settle doubts by the rules

established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and interests

47
 shall prevail. If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it
cannot be known what may have been the intention or will of the parties, the contract
shall be null and void. (1289)
Discussion:

Discussion:
If Articles 1370 to 1377 cannot apply, this article will be considered as the last resort.

In case of doubts on the incidental circumstances of the contract, and the contract is
gratuitous, the least transmissible of rights and interest shall prevail.
E.g.:

A pacto de retro sale should be interpreted as providing for the least transmissible of
rights. The construction favoring the right to redeem should be adopted which right is
considered a natural right.

In case of doubts on the incidental circumstances of the contract, and the contract is
onerous, the doubt shall be construed in favor of the greatest reciprocity of interests.
E.g.:

When there is doubt as to whether the contract is a loan or a sale, to hold that the
land was conveyed as security for a loan would afford greater reciprocity of interest.

If there is doubt on the principal object of the contract and it cannot be determined
what might have been the intention or will of the contracting parties, the contract
shall be void. This is in line with Article 1409, par. 6.

D. Applicability of Rule 123, Rules of Court (now Secs. 10-19, Rule 130)
ARTICLE 1379. The principles of interpretation stated in Rule 123 of the Rules of
Court shall likewise be observed in the construction of contracts. (n)

Interpretation Of Documents

Section 10. Interpretation of a writing according to its legal meaning. — The

language of a writing is to be interpreted according to the legal meaning it bears in
the place of its execution, unless the parties intended otherwise. (8)

Section 11. Instrument construed so as to give effect to all provisions. — In the

construction of an instrument, where there are several provisions or particulars, such
a construction is, if possible, to be adopted as will give effect to all. (9)

Section 12. Interpretation according to intention; general and particular

provisions. — In the construction of an instrument, the intention of the parties is to
be pursued; and when a general and a particular provision are inconsistent, the
latter is paramount to the former. So a particular intent will control a general one that
is inconsistent with it. (10)
48
Section 13. Interpretation according to circumstances. — For the proper
construction of an instrument, the circumstances under which it was made, including
the situation of the subject thereof and of the parties to it, may be shown, so that the
judge may be placed in the position of those who language he is to interpret. (11)

Section 14. Peculiar signification of terms. — The terms of a writing are

presumed to have been used in their primary and general acceptation, but evidence
is admissible to show that they have a local, technical, or otherwise peculiar
signification, and were so used and understood in the particular instance, in which
case the agreement must be construed accordingly. (12)

Section 15. Written words control printed. — When an instrument consists partly
of written words and partly of a printed form, and the two are inconsistent, the former
controls the latter. (13)

Section 16. Experts and interpreters to be used in explaining certain writings.

— When the characters in which an instrument is written are difficult to be
deciphered, or the language is not understood by the court, the evidence of persons
skilled in deciphering the characters, or who understand the language, is admissible
to declare the characters or the meaning of the language. (14)

Section 17. Of Two constructions, which preferred. — When the terms of an

agreement have been intended in a different sense by the different parties to it, that
sense is to prevail against either party in which he supposed the other understood it,
and when different constructions of a provision are otherwise equally proper, that is
to be taken which is the most favorable to the party in whose favor the provision was
made. (15)

Section 18. Construction in favor of natural right. — When an instrument is

equally susceptible of two interpretations, one in favor of natural right and the other
against it, the former is to be adopted. (16)

Section 19. Interpretation according to usage. — An instrument may be

construed according to usage, in order to determine its true character. (17)

49
 DEFECTIVE CONTRACTS

Chapter VI. Rescissible Contracts

A. Kinds- Art 1381

B. Characteristics
1. Their defect consists in injury or damage either to one of the contracting parties or to
third persons.
2. They are valid before rescission
3. They can be attacked directly only, and not collaterally
4. They can be attacked only either by a contracting party or by a third person who is
injured or defrauded.
5. They can be convalidated only by prescription, and not by ratification.

C. Rescission- Art. 1380

1. Definition
2. As distinguished from rescission under Art. 1191

Case: Universal Food Corp. v. CA. 33 SCRA 1 (1970)

3. Requisites
4. Effects of rescission- Art 1385
5. Extent of rescission- Art 138 6. Presumptions of fraud- Art 1387 7.
a. Badges of fraud

Cases:
Oria v. Memciking, 21 Phil. 243 (1912)
Siguan v. Lim, et. al, 318 SCRA 725 (1999)
Suntay v. CA, supra

8. Liability for acquiring in bad faith the things alienated in fraud of creditors- Art 1388.

Chapter VII. Voidable or Annullable Contracts

A. Kinds- Art. 1390

B. Characteristics
50
 1. Their defect consists in the visitation of consent of one of the contracting parties.
2. They are binding until they are annulled by a competent court.
3. They are susceptible of convalidation by ratification or by prescription.

C. Annulment
1. As distinguished from rescission
2. Grounds- Arts. 1390
3. Who may and may not institute for annulment- Art 1397

Case: Singsong v. Isabela Sawmill, 88 SCRA 623 (1979)

4. Prescription- Art 1391

5. Effect
a. Mutual Restitution – Arts. 1398 and 1402

Cases:
Cadwallader & Co. v. Smith, Bell & Co., 7 Phil 461 (1907)
Velarde v. CA, supra

1. When one of the parties is incapacitated- Art 1399

2. When the thing is lost through the fault of the party obliged to return the
same – Art 1400

6. Extinguishment of the action

a. By ratification – Art 1392
b. When the thing is lost through the fault of the person who has the right
to file the action- Art 1401

D. Ratification

1. Requisites

a. The contract is voidable;

b. The ratification is made with knowledge of the cause for nullity;
c. At the time of the ratification, then cause of nullity has already ceased to exist.

2. Forms

a. Express or tacit- Art 1393

b. By the parties themselves or by the guardian in behalf of an incapacitated
party- Art 1394

3. Effects
a. Action to annul is extinguished- Art 1392
b. The contract cleansed retroactively from all its defects- Art 1396

Chapter VIII. Unenforceable Contracts

51
A. Characteristics
1. They cannot be enforced by a proper action in court.
2. They are susceptible of ratification
3. They cannot be assailed by third persons.

B. Kinds – Art. 1403

1. Unauthorized contracts
a. Governing rules – Art. 1404

2. Contracts covered by the Statute of Frauds

a. Purpose of Statute

Case:
Limketkai Sons Milling Inc., v. CA G.RNo. 118509,
December 1, 1995
Swedish Match v. CA, G.R. No. 128120, October 20, 2004

b. How ratified- Art 1405

Case
Carbonnel v. Poncio, et. al. 103 Phil 655 (1958)

c. Right of the parties when contact is enforceable but a public document is

necessary for its registration- Art 1406

3. Contracts executed by the parties who are both incapable of giving consent to a
contract.
a. Effect of ratification by the parents or guardian of one of the parties –
Art. 1407
b. Effect of ratification by the parents or guardian of both parties- Art.
1407

CHAPTER IX. Void or Inexistent Contracts

A. Characteristics
1. Void from the beginning
2. Produces no effect whatsoever
3. Cannot be ratified- Art 1409

B. Kinds- Art 1409

1. Contracts that are void
a. Those whose cause, object, or purpose is contrary to law, morals, customs,
public order or public policy.

1.) When the act constitutes a criminal offense –Art 1411

a. In pari delicto rule
Case: Urada v. Malapad A.M. MTJ91-622 (19930
52
 2.) When the act is unlawful but does not constitute a criminal offense – Art 1412
a. In pari delicto rule

Case: Modina v. CA G.R No. 109355, October 29, 1999

3.) When the purpose is illegal, and money is paid or property delivered therefor-
Art 1414
4.) When the contract is illegal and one of the parties is incapable of giving
consent – Art 1415

Cases:
Liguez v. CA, supra
Relloza v. Gaw Cheen Hum, 93 Phil. 827 (1943)

5.) When the agreement is not illegal per see but prohibited- Art 1416

Cases:

Philippine Banking Corp. v. Lui She, 21 SCRA 52 (1967)

Frenzel v. Catito, 406 SCRA 55 (2003)

6.) When the amount paid exceeds the maximum fixed by law- Art 1417
7.) When by virtue of a contract a laborer undertakes to work longer than the
maximum number of hours of work fixed by law – Art 1418
8.) When a laborer agrees to accept a lower wage than that set by law- Aert
1419.
9.) When the contract is divisible – Art 1420
10.) When the contract is the direct result of a previous illegal contract- Art
1422

b. Those whose object or cuasa is outside the commerce man

c. Those which contemplate an impossible service
d. Those where the intention of the parties relative to the principal object of the
contract cannot be ascertained.
e. Those expressly prohibited or declared void by law

2. Contracts that are inexistent

a. Those which are absolutely simulated or fictitious ( See Arts. 1345 and 1346)
b. Those whose cause or object be waived- Art 1409

C. Rights to set up defense of illegality cannot be waived- Art 1409

D. The action or defense for the declaration of the inexistence of a contract.
1. Does not prescribe – Art 1410
2. Is not available to third persons whose interest is not directly affected – Art 1421

TITLE III. NATURAL OBLIGATIONS

A. Definition – Art. 1423

53
 B. As distinguished from civil obligations- Art 1423
C. As distinguished from moral obligations-

Cases:
Villaroel v. Estrada, 71 Phoil 140 (1940)
Fisher v. Robb, 69 Phil 101 (1939)
D. Conversion to civil obligation
1. By novation
2. By ratification

E. Examples- Art 1424-1430

TITLE IV. ESTOPPEL

A. Definition – Art 1431

Case: Kalalo v. Luz, 34 SCRA 337 (1970)

B. Kinds
1. Technical estoppels
a. By record
b. By deed- art 1433
2. Equitable estoppels or estoppels in pais- Art 1433

C. Persons bound- Art 1439

Case: Manila Lodge No. 761 Benevolent and Protective order of the Elks v.
CA, 73 SCRA 168 (1976)

D. Cases where estoppel applies- Art 1432-1438

Case:

Miguel v. Catalino, 26 SCRA 234 (1969)

Read: Annotation, 32 SCRA 542

Title V. TRUSTS

Chapter I. General Provisions

A. Definition
B. Governing Rules- Art 1442
C. Parties – Art. 1440
1. Trustor
2. Trustee
3. Beneficiary or cestui que trust

D. Kinds- Art 1441

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Case: Solao v. Solao, 70 SCRA 168 (1976)

1. Express Trusts

i. Proof required – Art 1443

ii. Form – Art. 1443 iii. Want
of Trustee- Art 1445
iv. Acceptance by the beneficiary – Art 1441

2. Implied Trusts

a. How established- Art, 1441

b. How proved – Art 1457
c. Examples- Arts. 1448-1456

Cases:

Fabian v.Fabian SCRA 231 (1968)

Bueno v. Reyes, 27 SCRA 1179 (1969)
Tamayo v. Callejo, 46 SCRA 27 (1972)

55